* Yen rises versus dollar, euro as Nikkei tumbles
* Worries that Fed may taper QE, weak China PMI hit stocks
* Euro helped somewhat by PMI data, still vulnerable
* Aussie hit hard by weak China data, falling commodity
NEW YORK, May 23 The yen broke recent trends and
jumped against the dollar and the euro on Thursday after a slide
in stocks sparked by a drop in Chinese factory activity prompted
a rush for the safe-haven Japanese currency.
China's factory activity shrank for the first time in seven
months in May as new orders fell, a preliminary manufacturing
survey showed, deepening fears that its economic recovery has
stalled and a sharper cooldown may be imminent. [ID:nL3N0E40OA}.
Concerns that U.S. monetary stimulus could be scaled back,
after testimony on Wednesday by Federal Reserve Chairman Ben
Bernanke, added to investors' caution and drove Japan's Nikkei
share index down 7.3 percent, its biggest one-day drop
since the period two years ago in the wake of the tsunami that
disrupted the Japanese economy in March 2011.
"What we saw was a massive selloff in Japanese equities and
a pullback in risk with the yen being the biggest beneficiary,"
said Omer Esiner, chief market analyst at Commonwealth Foreign
Exchange in Washington, D.C., but "a lot of the drivers are
still in place, and we are likely to see the dollar push higher
and the yen push lower."
At the session peak, the yen rose more than 2 percent
against the dollar and the euro. Both the greenback and the euro
lost 1 percent against the Swiss franc , also
seen as a safe haven.
The yen hit a two-week high of 100.82 to the dollar,
reversing a slide to a 4-1/2-year low of 103.73 yen on Wednesday
after Bernanke told Congress the Fed could "in the next few
meetings take a step down" in its bond buying.
The dollar was last at 101.63 yen, down 1.5 percent for the
day, with the session's swing between the low of 100.82 yen and
the peak of 103.56 yen. Some US$6.891 billion in yen changed
hands on Thursday on Reuters Dealing, the highest daily volume
since at least September.
With the dollar up about 17.2 percent against the yen this
year, analysts said the Chinese data and the drop in stocks
provided the excuse for a profit-taking correction.
"The market got overextended in terms of bullishness on
dollar/yen yesterday after the Bernanke comments. We now have
seen a correction and some uncertainty in the JGB (Japanese
government bond) markets," said Jeremy Stretch, head of currency
strategy at CIBC World Markets in London.
"The market was somewhat overbought and this prompted a
fairly aggressive reaction (in dollar/yen) which was overlayed
by a pretty seismic move in equities as well."
Analysts said the dollar could drop further against the yen
if stocks continued to decline. But they expected the trend of
yen weakness and dollar strength to remain given aggressive
easing in Japan and the prospect of tighter U.S. policy.
"The correction (in dollar/yen) has the potential to go
further ... But there is no risk of a dramatic fall and any move
below 100 should be brief," said Niels Christensen, currency
strategist at Nordea in Copenhagen.
Some traders focused on Bernanke's caveats that the central
bank would need to see more improvements in the economy before
reducing stimulus, even though the minutes from the Fed's most
recent meeting showed some policymakers were willing to cut bond
buying as early as June.
James Bullard, president of the Federal Reserve Bank of St.
Louis, said on Thursday that he did not think the Fed was "that
close" to starting the process of winding down its support
although it was the likely next step if the economy continued to
improve and inflation picks up.
The euro slid to a two-week low of 129.94 yen,
having touched a 3 1/2-year peak of 133.77 yen on Wednesday. It
was last at 131.26 yen, down 1 percent.
Against the dollar, the single currency was up 0.5
percent at $1.2915. The euro got a modest lift from data showing
the downturn across euro-zone businesses eased slightly this
But the numbers in the euro-zone PMI business survey pointed
to another contraction in the euro zone in the second quarter.
Analysts expected the euro to stay weak against the dollar,
given concerns that the Fed will taper its asset-purchase
program while the European Central Bank could ease monetary